Australia’s export earnings in decline

A new report released by the Department of Industry and Science shows Australia’s resources and energy commodity export earnings are estimated to have declined by 11 per cent in 2014-15 to $174 billion.

A decline in iron ore and metallurgical coal export earnings, which are estimated to have fallen by 27 per cent and 7 per cent respectively in 2014-15, were key drivers of the decline.

However, LNG export earnings have started to increase and are forecast to continue to grow as Australia sets down the path to becoming the world’s largest LNG producer.

According to the Department’s chief economist, Mark Cully, Australia’s domestic production of key commodities is continuing to expand in this environment of lower prices.

“The widespread fall in commodity prices through 2014 and early 2015 have led producers to shift focus from production expansion to managing costs and productivity,” Cully said.

“As a result exploration expenditure, employment and capital spending are all down in Australia.”

Iron Ore

The report blamed the falling iron ore price on higher iron ore production in Australia and Brazil, coupled with falling Chinese steel production.

The Department said the average iron ore price for the first four months of 2015 averaged US$57.80 per tonne.

With China’s  steel production is forecast to contract in 2015 and 2016 as the seaborne supply of iron ore increases, the iron ore price is expected to keep falling in 2015 to average $US54 per tonne, and even further in 2016 to average $US52 per tonne.

Putting more pressure on the iron ore price is the increase in the global trade of the commodity.

Global trade in iron ore is forecast to increase by one per cent in 2015 (year-on-year) to 1.37 billion tonnes.

In 2016 world trade in iron ore is forecast to increase by 3.6 per cent to 1.4 billion tonnes as Australia and Brazil increase supply by 10 and 6 per cent, respectively.

The report says while this rise is expected to displace some of China’s higher cost domestic production, the price required to stimulate such a supply shift are “clearly lower than the prevailing spot price.”

It also forecast that other high cost iron ore exporters would go under as they could not withstand a period of strong price competition.

In 2015 Australia’s exports of iron ore are forecast to grow by four per cent to 748 million tonnes.

In 2016 Australia’s exports of iron ore are forecast to grow by 10 per cent to 824 million tonnes as production at Roy Hill ramps up and the major Pilbara miners increase output.

In 2014-15 Australia’s iron ore export s are estimated to have fallen by 27 per cent to $54.3 billion as a result of lower prices more than offsetting the increased volume.

Export values are forecast to fall by a further 3.9 per cent in 2015-16, to $52.2 billion weighed down by a further drop in the price of iron ore.

Metallurgical Coal

According to the report, the falling price of metallurgical coal reflects surplus supply, lower demand, and lower production.

Spot prices for low volatility hard coking coal FOB Australia declined from around $US110 a tonne in early January to a low of $US82 in mid-May.

Spot prices averaged around $US95 a tonne in the first six months of 2015, around 18 per cent lower than in 2014.

Australian benchmark contract prices for high-quality metallurgical coal delivered in the June quarter 2015 settled at $US109.50 a tonne, down from $US117 a tonne in the March quarter. Contract prices are expected to remain weak over the remainder of 2015 owing to continued surplus supply and weak steel prices.

While several companies have announced plans to close capacity and reduce output, both in Australia and North America, the market is forecast to remain oversupplied until demand growth recovers.

 In 2016, high quality hard coking coal contract prices are forecast to average $US103 a tonne.

Australia’s production of metallurgical coal is estimated to have increased by 4.3 per cent to 188 million tonnes in 2014-15.

Thermal Coal

The report states the thermal coal market continues to be “plagued” by oversupply.

Thermal coal prices continued on a downward trajectory in the first half of 2015 in response to surplus supply and lower import demand from China.

Newcastle free on board prices began 2015 at around $US62 a tonne and declined progressively to around $US54 a tonne in mid-April. Prices have since recovered to around $US60 a tonne.

While some companies have announced their intention to cut production, there has not been enough reduction in capacity to reduce supply overhang, meaning spot prices are expected to remain under pressure over the remainder of 2015 and into 2016.

Australia’s exports of thermal coal increased by 3.2 per cent to 201 million tonnes in 2014- 15. Despite higher volumes, the value of these exports declined by an estimated 7 per cent to $15.6 billion because of lower prices.

In 2015-16, Australia’s thermal coal exports are forecast to increase by 0.4 per cent to 202 million tonnes. Earnings from thermal coal exports are forecast to decline by 6 per cent to $14.6 billion.

Gas

According to the report, new liquefaction capacity in Australia will support global LNG market growth over the next year.

Australia’s gas production and exports will also grow, but contract and spot price weakness will temper increasing export values.

Oil prices are forecast to remain relatively flat which will result in slight falls to contracted LNG prices in the June quarter before levelling out through the remainder of 2015 and into 2016.

Spot prices are expected to remain weak as extensive new regional supply continues to come online.

Prices for landed LNG are therefore expected to remain weak over the next 18 months, likely hovering around $US10–12 a gigajoule in Japan.

Australian gas production rose slightly in the March quarter to 16.0 billion cubic metres as increased CSG production associated with Queensland LNG projects offset flat conventional gas production.

Australia is estimated to have produced 65.7 billion cubic metres of gas in 2014–15 (equivalent to 48 million tonnes of LNG), a 4.4 per cent increase on 2013–14.

In 2015–16, new LNG plants will remain the predominant source of gas production growth in Australia, driving a 30 per cent rise in output to 85.1 billion cubic metres (62 million tonnes).

Exports are estimated to reach $18.0 billion in 2014–15 and $24.4 billion in 2015–16 due to strong volume growth and modest currency depreciation effects.

Gold

In 2015 the average gold price is forecast to decrease 4.8 per cent compared to 2014 to $US1205 an ounce.

In 2016 the average gold price is forecast to decrease a further 1.1 per cent to $US1193 an ounce based on the expectation that the US Federal Reserve starts raising interest rates.

World gold mine production is forecast to increase 1.0 per cent to 3147 tonnes in 2015, relative to 2014.

In 2016 world gold production is forecast to increase to 3158 tonnes. Growth in mine production is forecast to slow to 0.3 per cent from 2015 to 2016.

Australia’s gold production in 2014-15 is estimated to have declined 0.9 per cent relative to 2013-14 to 272 tonnes.

The report said production remained steady with moves to reduce costs and a more favourable exchange rate supporting industry profits against a backdrop of lower gold prices.

Gold production in 2015-16 is forecast to remain relatively flat compared to 2014-15, increasing a moderate 1.5 per cent to 276 tonnes. The forecast increase reflects new projects such as Doray Minerals Deflector mine, and Black Oak Minerals’ Marda mine, expected to come online towards the end of 2015-16 as well as the redevelopment of Metal X’s Central Murchison mine, expected to come online in the first half of 2015-16.

Gold export values are estimated to be $14 billion in 2014-15, 7 per cent higher than 2013-14, supported by higher volumes and a higher Australian dollar gold price. Refined gold export volumes in 2015-16 are forecast to increase 2 per cent relative to 2014-15 to 289 tonnes.

 Gold export values are forecast to increase 4.8 per cent to $14.6 billion in 2015-16 relative to 2014-15 due to increased volumes and an expected lower exchange rate for the Australian dollar.

Aluminium

According to the report, a supply glut and spare production capacity has worked to keep aluminium prices low in 2015.

The LME aluminium spot price averaged $US1800 a tonne in the March quarter 2015, down 9 per cent from the previous quarter. The aluminium price has since shown substantial volatility in the June quarter, trading between $US1661 and US$1919. For the full year 2015, prices are forecast to average $US1819 a tonne, 2.5 per cent lower than 2014.

Despite the surplus, more aluminium smelters are expected to come online in 2015 and cause the prevailing market imbalance to continue.

The report states that world aluminium production is forecast to increase 4.8 per cent in 2015 to 52.3 million tonnes.

In 2016 world aluminium production is forecast to increase 4.3 per cent to 54.5 million tonnes.

Australia’s production of aluminium in 2014-15 is estimated to be 1.6 million tonnes, 8 per cent lower than 2013-14, due to the closure of Alcoa’s Point Henry smelter in August 2014.

In 2014-15 aluminium exports are estimated to be 1.4 million tonnes, 12 per cent lower than 2013-14, resulting from lower domestic production. Export values are estimated to be $3.6 billion, 4.4 per cent higher than the previous year.

Aluminium exports are forecast to remain at around 1.4 million tonnes in 2015-16 but with export values decreasing 6 per cent to $3.4 billion due to lower aluminium prices.

Copper

A market surplus and growing stocks is expected to see the average LME copper price decline 14 per cent in 2015 to $US5905 per tonne.

Copper prices are forecast to decline a further 1.2 percent in 2016 and to average US$5831 a tonne, the report stated.

Australia’s copper mine production is estimated to have decreased 2.0 per cent to 969 000 tonnes in 2014-15, compared to 2013-14. The decrease in production is mainly due to a production disruption at BHP Billiton’s Olympic Dam.

Australia’s total copper metal content exports in 2014-15 are estimated to remain similar to the previous year at 1 million tonnes. Export values are estimated to increase 0.7 per cent to $8.8 billion.

In 2015-16 copper exports are forecast to increase 8 per cent to 1.1 million tonnes (metal content). Increased domestic production will support higher export volumes, and export values are forecast to increase 8 per cent to $9.4 billion reflecting a forecast higher Australian dollar price in 2016.

Nickel

Against market expectations, nickel prices have fallen in 2015, the report said.

The average LME nickel price decreased 9 per cent in the March quarter 2015, relative to the previous quarter, to $US14 338.

For the full year 2015 the LME spot price is forecast to average $US13 667 a tonne, down 19 per cent from 2014, as high stocks and lower consumption growth weigh on prices.

Prices are forecast to increase 4.3 per cent in 2016 to average US$14 250 supported by falling stocks.

In 2014-15 Australia’s mined nickel production is estimated to have decreased 7 per cent (year-on-year) to 242 000 tonnes, following production curtailments at several mine sites and the suspension of operations at the Perseverance mine.

Australia’s exports of nickel in 2014-15 are estimated to have increased by 5 per cent to 253 000 tonnes and earnings to have increased by 14 per cent to $3.8 billion.

In 2015-16 Australia’s exports are forecast to increase by 4.3 per cent to 264 000 tonnes in line with an increase in production. Earnings from nickel exports are forecast to increase by 2.1 per cent to $3.8 billion following an increase in production and prices.

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